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Thursday, November 27, 2008

NEW YORK - The Federal Deposit Insurance Corp. said Tuesday the list of banks it considers to be in trouble shot up nearly 50 percent to 171 during the third quarter - yet another sign of escalating problems among the institutions controlling Americans' deposits.

The 171 banks on the FDIC's "problem list" encompass only about 2 percent of the nearly 8,500 FDIC-insured institutions. Still, the increase from 117 in the second quarter is sharp, and the current tally is the highest since late 1995.

"We've had profound problems in our financial markets that are taking a rising toll on the real economy," said FDIC Chairman Sheila Bair in a statement, adding that Tuesday's report "reflects these challenges."

Banks across the country have been hurt - and in some cases, devastated - by the collapse of the subprime mortgage market and subsequent problems across the lending spectrum. As the FDIC report shows, the number of hobbled institutions is rising at a quickening pace, a trend that has already begun to reshape the banking industry.

The FDIC said total assets held by troubled institutions climbed from $78.3 billion to $115.6 billion - a figure that suggests that the nation's top 20 banks aren't on the list, even though they are getting slammed, too, by the growing credit crisis. The FDIC does not reveal the names of the institutions it deems troubled.

Bert Ely, a banking consultant based in Alexandria, Va., pointed out that the assets held by problem banks represent less than 1 percent of those held by all U.S. banks. "We're still talking about a fairly small portion of the industry," he said.And on average, only about 13 percent of institutions on the FDIC's list end up failing.

Still, banks that don't make the list can end up collapsing anyway - the two biggest bank failures over the past year, Washington Mutual Inc. and IndyMac Bancorp, had not been on the FDIC's list of troubled banks. Wachovia Corp. (WB), which nearly failed before it got bought by Wells Fargo & Co. (WFC) in October, had not been on the list, either.

Nine banks failed in the third quarter, decreasing the FDIC's deposit insurance fund to $34.6 billion from $45.2 billion in the second quarter. This quarter, the pace appears to be picking up - nine banks have already failed since Sept. 30, including Downey Savings and Loan Association, based in Newport Beach, Calif.

"To some extent, a bank failure is a regulatory failure," Ely said. Regulators, if they address bank problems early on, can convince a troubled bank to sell off assets, raise capital or find a buyer, he said. "My hope is they're moving faster on these problems."

The FDIC said Tuesday that commercial banks and savings institutions suffered a 94 percent drop in third-quarter profits to $1.7 billion from $27 billion in the same period last year. Except for the fourth quarter of 2007, it was the lowest quarterly profit since the fourth quarter of 1990.

Those institutions wrote off $27.9 billion in loans as uncollectible during the quarter.

Recently, community banks - defined as those with assets under $1 billion - have started to show similar stresses as their larger counterparts, the FDIC said.

James Chessen, chief economist at the American Bankers Association, said in a statement that the banking industry as whole, however, "remains well-positioned to meet the credit needs of local communities." Since last year, bank lending to businesses has risen by more than 8 percent, while bank lending to individuals has risen by nearly 7 percent, he said.

The U.S. government has been guaranteeing and buying more and more types of debt in an effort to keep the financial system functional. Late Sunday, Citigroup Inc. (C) got a government backstop for $306 billion worth of mortgages and other assets. On Tuesday, the Federal Reserve agreed to buy up to $600 billion in mortgage-backed assets.